Causality between economic factors on tax revenue in Malaysia

This study investigates the causality relationship between government expenditure (TE), Gross Domestic Product per capita (GDPPC), inflation rate (IR) on tax revenue (TR) in Malaysia. This study adopted the annually data from the period 1970 to 2013. The unit root test result show that TE, GDPPC, IR and TR of Malaysia were stationary at first difference, which is I(1). The empirical results of Vector Error Correction Model (VECM) test show that in the short run only TR will cause to GDPPC which uni-directionally. However, the results suggested that the TR solely bears the brunt of short run adjustment to bring about long run equilibrium. To investigate the linkages between TE and TR in Malaysia the Granger causality method has been employed. The results suggests that validity of spend-test hypothesis in Malaysia. According to Barro (1974), this hypothesis suggests that government will determine the expenditure first before decide the tax rate to finance the expenditure. Therefore, government should spend carefully by avoiding unnecessary spending